When Ravi Kumar from Mumbai checked his crypto wallet on July 4, he was shocked to see the value of GARI plummet. “GARI was trading at $0.75 when I woke up that day. But the cryptocurrency started crashing during the day. My whole portfolio shrunk over 85 per cent in 24 hours,” he said.
The value of GARI, the crypto token native to the Chingari short video app, is in an abyss. The Salman Khan-backed cryptocurrency, which was up 40 per cent in June when the whole crypto market was in shambles, is now down over 90 per cent from its all-time high.
So, what happened to GARI and what lessons can investors learn?
‘The Black Swan event’
On July 4 at around 6.30 am, the crypto token was trading at $0.7511. Within hours, the value of the cryptocurrency started crashing. By 10.30 pm, the cryptocurrency fell to $0.1151, 85.33 per cent down in a single day.
Sumit Ghosh, CEO, and co-founder of the Chingari app said, “The current price movement was just a black swan event. Prices first fell due to a large sell order of 2 million tokens, which our market maker, GSR, could not handle.”
In crypto trading, market makers limit price variation or volatility by setting a limited trading price range for the assets that are being traded. In the aforementioned case, an investor who held a huge chunk of GARI tokens, dumped them in the market causing a crash. Since the magnitude of the tokens dumped was so huge, the market maker was unable to curtail the volatility.
“A market order can often accommodate 600k worth of orders, but no one anticipated a sell order of 2 million tokens. For comparison, the volume was just around 300k on the prevailing night of this incidence. This increased GARI's price to $0.14, which sparked further liquidations and sell-offs that resulted in a price crash," Ghosh added.
Just like Kumar, several investors who held the crypto token felt the pinch of the crash.
Ghosh echoed the pain of the investors. “The experience has been unpleasant for many of our retail investors because the correction affected their valuation. There have been allegations of hacking and rug pull which we completely deny,” he said.
Sharat Chandra, crypto markets commentator and vice president at Earth ID, a web3 platform, told Business Today, “Despite celebrity endorsement and fanfare, the failure of GARI token underscores the significance of having the right tokenomics and effective communication with the community members.”
GARI, along with the Chingari app, was widely was widely endorsed by Bollywood actor Salman Khan. Khan had also launched the cryptocurrency earlier this year.
Chandra further added, “The ambiguity on tokenomics not only abetted token dumping leading to a fall in prices but also eroded investors' trust.”
Tokenomics refers to the supply and demand characteristics of a cryptocurrency. In the case of GARI, users earn by creating, watching, sharing, and liking content on the Chingari app from a daily pool of 50,000 tokens. Moreover, users are also rewarded for just logging into the app.
Like Chandra pointed out, 'tokenomics' is the key and is at the center of every new project. He explained, “All new crypto token launches will be subject to token economics and investor rights scrutiny. Given the bearish market sentiment, this does not augur well for business models driven by tokenization.”
Is regulation need of the hour?
The recent incident highlights how regulation and consumer protection is the need of the hour when it comes to crypto. Several countries are already leading the way when it comes to regulation. Indian regulatory bodies too have been cautioning investors with the RBI calling for a ban.
“Regulators across the globe have been cautioning against the volatility risks associated with crypto. UK's Financial Conduct Authority(FCA) and Singapore's Monetary Authority of Singapore (MAS) issued guidelines to discourage crypto trading by the general public. The US Treasury has taken the initiative of introducing an international framework for crypto regulation,” Chandra explained.
GARI is currently trading at $0.09567 as of 14:00, data from CoinMarketCap showed. The cryptocurrency is down 90 per cent from its all time high of $0.95 in late February this year.
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